Is Liquidation The Best Option? By Benedict Smythe At Isnare.com Ezine Articles

The onset of globalization brought about an increase in the international flow of goods, services, capital, information, and technology. No one can ever predict how this rapid influx can affect a country’s currency, stock markets, and other aspects of its economy. It seems that volatility is inherently built into the economy of any country. As such, many sectors of society continue to be affected. One of them is the business sector as can be seen in the number of businesses that permanently close down and sell their companies or leave them in a non-working condition.

These affected businesses usually turn to liquidation as a last resort. Liquidation refers to process of converting a company’s assets like furniture, buildings, copyrights, and patents into cash. The cash is then used by the company to pay off its outstanding debts. There are three types of liquidation: member’s voluntary liquidation, creditor’s voluntary liquidation, and compulsory liquidation.

Member’s voluntary liquidation is when the owners of a company, meaning its shareholders, stockholders or partners, choose to liquidate their assets in order to settle their debts. In this kind of liquidation, the decision is based on the free will of the owners. Moreover, the amount that would be obtained from liquidating the assets is greater than the amount of the outstanding debt. This means that the company is solvent and that it will still gain something from the process.

Creditor’s voluntary liquidation is when the owners of a company choose to liquidate their assets in order to pay off outstanding debts. Unlike in member’s voluntary liquidation, the company owners have no choice but to resort to liquidation. Moreover, the amount of debts exceeds the amount they could get from liquidating their assets, meaning the company is insolvent. The company would thus not be able to benefit from it. In fact, there would still be a deficit since the entire amount of the debt would not be covered. This type of liquidation is the most common among the three.

Compulsory liquidation, unlike the other two types of liquidation, does not involve any decision-making by the owners of the company. This happens when a court declares the insolvency or bankruptcy of a company since it has no other way of paying off its obligations. It then orders a liquidator or receiver to analyze the assets of a company and decide on how to divide the proceeds in order to pay off the outstanding debts. Before compulsory liquidation takes place, the director ensures that all trading is ended so that the company would not get into more credit issues.

If a company perceives that it will get into a sticky situation in the future and that it will have a hard time clearing its debts, liquidation is a good solution, at least by resorting to it even before the court orders it to do so. By doing so, it will be able to avoid the stigma of compulsory liquidation. However, the most ideal solution is to prevent an imbalance in the credit standing of the company and keep it in control.

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